Unintended Consequences of Eliminating Tax Havens

Eliminating firms’ access to tax havens can have unintended consequences for their domestic economic activity. We study a policy that limited profit shifting by U.S. multinationals and show it raised the tax cost of domestic investment. Firms affected by the policy responded by reducing investment and domestic employment. Firm-level responses were amplified to local labor markets through the establishment networks of profit-shifting firms. More exposed local labor markets experienced declines in employment, income, and home values and saw increases in government transfers. Policy proposals that limit profit shifting should therefore consider effects on economic activity in addition to tax revenue.